Sleep Easy With 3 Debt-Free Dividend Payers

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We all know the story of the tortoise and the hare. In the investing world, our hares are represented by high-growth stocks, and our turtles are ... dividend stocks. Though being a hare is much sexier, study after study has shown that it's plenty wise to be a tortoise.

Taking it a step further, we can even break up dividend stocks into a sexy, high-yielding group, and a less exciting but more sustainable group.

Today, I'm going to offer you three stocks from the latter group that can shepherd your retirement portfolio over the coming decades, while helping you sleep better at night.

But first, why not high yielders?
There's nothing inherently wrong with high-yielding stocks. But if you want to buy companies with rock-solid balance sheets and little to worry about, these types of stocks may not be for you.

Consider the chart below. While these four companies have very high dividend yields, they're also using a lot of their earnings to pay out those dividends:

Company

Dividend Yield

Payout Ratio

Himax Technologies (NAS: HIMX) 6.3%343%
PDL BioPharma (NAS: PDLI) 9.7%98%
CenturyLink (NYS: CTL) 7.8%97%
Windstream (NAS: WIN) 8.2%182%

Source: Yahoo! Finance.

Although CenturyLink and Windstream have free cash flow that greatly exceeds earnings, Himax and PDL have high payout ratios even when you measure them against cash flow. That means that if tough times hit, they may have to either use debt to pay the dividends or cut them. Ideally, you'd like to see payout ratios below 80% for ultra-safe companies, and 60% or less for riskier stocks.

Sustainability
After that rather scary look at how vulnerable some dividends can be, peruse the payout ratios of the three stocks I've picked out below:

Company

Dividend Yield

Payout Ratio

Activision Blizzard (NAS: ATVI)

1.4%

38%

Resources Connection (NAS: RECN)

1.3%

30%

Cognex (NAS: CGNX)

1.1%

17%

Source: Yahoo! Finance.

Although the yields might not be terribly exciting, these three dividend payers have payout ratios well below the danger zone. All three companies could hypothetically increase their dividend yields substantially and still be considered "safe." And all three companies still have serious potential for capital appreciation (read: rising share prices) as well.

We aren't even to the best part yet!
If a business is willing to give shareholders a dividend, it needs to make sure there's enough cash on hand to cover all of the other expenses. When a company has no long-term debt, it makes the decision to pay dividends exponentially easier.

Amazingly, these three stocks have no long- or short-term debt. Their balance sheets are 100% debt-free! While that could be expected of a capital-light business like consulting -- and Resources Connection fits that bill -- it's an impressive for the other two companies.

In 2010, video game maker Activision had operating expenses that ate up 66% of gross profits, plus an asset writedown that ate up another 14%. Mechanical visual specialist Cognex wasn't far behind, with operating expenses eating into roughly 64% of gross profits.

If it sounds like I'm putting down the companies because of this, I'm not. I'm marveling at their ability to produce generous free cash flow.

The Foolish takeaway
As I stated, these types of companies don't offer the kind of yields investors usually long for. But because they provide sustainable dividends, coming from debt-free companies that still have the potential to grow, they deserve a place on your watchlist.

If you're looking for more dividend ideas, consider some names from a free report from The Motley Fool's expert analysts, "13 High-Yielding Stocks to Buy Today." A senior retail analyst calls one of these ideas "the dividend play of a lifetime." Tens of thousands have requested access to this report, and today I invite you to download it at no cost to you. Get instant access to the names of these 13 high yielders. It's free!

At the time this article was published Fool contributorBrian Stoffelowns shares of Activision Blizzard. The Motley Fool owns shares of and has written calls on Activision Blizzard.Motley Fool newsletter serviceshave recommended buying shares of Cognex and Activision Blizzard, and creating a synthetic long position in Activision Blizzard. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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